About Piponomics

Economics plays a huge role in the foreign exchange market. I enjoy looking at economic trends and trying to see how it may affect currencies, and life in general. I will post my thoughts and observations here. I'm throwing macroeconomics, forex trading, pop culture, and everyday life into a pot and hopefully the final product are lessons about the FX market that's easy to understand.

G-20: All Bark and No Bite?

A week after Valentine’s Day, G20 finance ministers decided to have their own rendezvous, but without the candlelight and fine wine. Instead of exchanging sweet nothings, they decided to talk about constructing some reforms for the international monetary system, rising inflation, and trade imbalances. Looks like they’re planning for a happily ever after already!

G20 leaders seem to have very lofty goals of saving the world from all its economic troubles. First, they talked about the need to reform the international monetary system – *cough* China’s artificially weak currency *cough* – in order to address trade imbalances. The West having huge deficits, while the East enjoying a healthy trade surplus is just tale as old as time, and the G20 insisted that it’s about time to even it out.

Aside from that, the finance ministers also spent some time discussing the latest threat to the global economic recovery, which is rising inflation. They all acknowledged that they must take measures to keep inflation subdued. But the problem is if they hike rates too soon, they might derail growth. Hmm, tell me something I don’t already know…

That pretty much wraps up what took place during the G20 summit over the weekend. While the finance ministers hardly accomplished anything then, they promised that they’d address these economic issues in their next meeting in April. But why do I have a nasty feeling that it’ll be a dud as well?

Think about it… Have you heard any hard resolutions or concrete concerted actions from them?

No?

Yeah, that’s what I thought too!

As a result of the G20’s inaction, the market has very low expectations for April’s meeting. It’s quite sad considering how much the world clung their every word during the financial crisis.

How did it come to this? I guess it’s a combination of a couple of things.

First, while definitely not as fast as expected, global recovery is happening, which has reduced the need of immediately dealing with the current economic problems. The International Monetary Fund (IMF) has reported that the world economy managed to expand by 5% in 2010.

Second, the G20 seems to have been talking about the wrong things. The G20 keeps discussing how they could MEASURE trade imbalances, but they hardly talk about how they could SOLVE it.

For instance, Japanese Finance Minister Yoshihiko Noda Friday mentioned that the G20 was still deciding whether to use foreign currency reserves or exchange rates to measure imbalances. I don’t know about you, but that’s like arguing whether to use meters or inches to see how tall a person is!

Last, some of the issues the G20 is concerned about are too long term for anyone to care about. One of these issues, for example, is reducing the world’s dependency on the U.S. dollar as the reserve currency.

While it is an important topic, finding an alternative reserve currency will take years or even decades. The fact is, the U.S. dollar is the most liquid currency of all and there really is no viable alternative as of now.

Is it just me or are the G20 finance ministers starting to come off more and more as Theorycrafters?

Theo-whatta?!?

All my Starcraft nerds probably know what I’m talking about. Basically, Theorycrafting is when players would brag that they have the best strategies against each other but don’t actually put them into practice. This results in an overly naive model.

Perhaps the G20 leaders need to be reminded of what their role is: to COORDINATE economic and monetary policies. Yeah, each country has its own issues to deal with but maybe they should also take into consideration those of others.

Instead of formulating long-term goals, which will most probably be forgotten even before they’re started, leaders should focus on the here and now because although the economic environment has improved, recovery is still on shaky ground.

It may be better for the G20 to take small but concrete baby steps to avert a crisis and not wait for one to break out before they actually do something. Ya know what they say, “Prevention is better than cure.”